RetireMentors

Investing

Six ways retirees fool themselves

Rob Isbitts is the founder of
Sungarden Investment Research,
an investment management and equity research firm. Over the past three decades, Rob has managed daily liquid
portfolios through diverse market conditions. He created several investment
strategies, including the
Sungarden Hedged Dividend portfolio, an alternative approach to the pursuit
of income, preservation and long-term growth. Rob has managed mutual funds and
authored two books. He can be
followed on Twitter @robisbitts.

I suspect that investor hubris is at an all-time high, perhaps rivaled only by that which existed in the late 1990s. But the stakes are far higher now than they were then. Baby boomers are retiring in droves, and so the number of people with very little margin for error is higher than it was 15 years ago. At the same time, bond rates are far lower than they were in the late 1990s, which takes away a valuable crutch from the conservative retiree.

Why do I say that? As someone who entered the investment management business in 1986, seen it as a strategist, mutual fund manager, client adviser, blogger and most recently as one of the MarketWatch RetireMentors, I have had a front-row seat for this long-term evolution of markets and investor behavior. It has been a nearly 100,000-hour observation period in which to amass some perspective. And what I see concerns me.

The (mistaken) assumptions

How does this investor hubris manifest itself today? Through the gradual development of oversimplified assumptions that have gained momentum in recent years. They have now become part of the “the herd mentality” among retirees and pre-retirees. These now have the potential to leave retirees feeling that they have been lied to…by themselves! They are:

Investing is simple…you can do it on your own with a little online research and a basic asset allocation website.

Low cost investing = successful investing.

Most professional money managers don't beat the S&P 500…therefore, you should not use them.

Stock market plunges are brief and you make up the losses in a reasonable period of time…so hang in there.

Even if the stock market falls hard, bonds, the go-to asset for capital preservation, will rise to offset much of the financial pain.

“Alternative investments” such as gold, real estate and non-U.S. investments act as an antivirus in times of market turmoil.

But just because something is accepted as the conventional wisdom, it does not mean it is true. And even if it is partially true, that fact may not really be something you should care about. Here is how to sift through the hyperbole and focus on which, if any, of these assumptions should matter to you:

Investing is simple

The Internet and ubiquitous TV financial media have certainly made information readily available. But information is one thing, knowledge is another. Approaching retirement investing the same way you shop on eBay or Amazon is something that seems like a straight-line assumption you can afford to make.

But let's remember that it has been over five years since there has been much palpable damage in the major market gauges. From 1995-1999, it seemed easy. Then, the dot-com bubble occurred. From 2003-2007, it seemed easy again. Then, the financial crisis hit. And here we are again. Can we expect anything different this time? I doubt it. What is your plan to take the next bout of market chaos head-on? It is best to know now what you will do then.

Low-cost is the only way to go

Indexed investing has become America's retirement investing pastime. The motivation for index investors is to minimize the costs of investing. It continues to amaze me that other, often bigger costs of investing are largely ignored in favor of the “feel good” approach of investing in the entire market instead of being selective. What other costs am I talking about? One is the impact of capital gains taxes. The other is the cost of losing a bunch when the index you are invested in drops through the floor. When your portfolio drops 20%, do you feel like a champion because your fund expense ratio was only one quarter of one percent?

I am not suggesting that indexing does not have place in retirement investing. But it seems that indexing has reached the status where anything that is promoted as an indexed investment is judged to be inexpensive and expected to deliver the results of whatever market segment it tracks. Particularly in regards to exchange-traded funds (ETFs), it appears Wall Street is indexing everything that isn't nailed down…and passing it off as if it's the lowest-cost market index fund.

Pro money managers are losers

Ask around, and you will likely find people who have read or heard something like "90% of professional money managers don't beat the S&P 500.” I became so frustrated hearing that, I decided to study it and see if it was true. It isn't!

(NOTE: I will soon publish the research I refer to here as part of an upcoming article in Marketwatch's RetireMentors section. Keep an eye out for it, or contact me if you want to be notified when it is released).

Ignore those market declines

Markets are cyclical, and that means we should never be surprised when a market drop of some magnitude occurs. Following on the previous section, if beating the S&P 500 is your retirement plan, I assume you have planned for how you will live the next time you see 1/3 or more of your S&P index fund portfolio disappear in the next bear market. After all, investing in an index and holding that index for a long time buys you the ups and the downs of that market segment. However obvious that may be, I find that many retirees forget that when enough time has passed since the last major decline.

Bonds will save the day

I have written about this extensively, so to sum it up: Bonds aren't the same animal they were for the past three decades. Rising or flat interest rates will deliver a very different experience for bond investors. “The Sungarden Study,“ which I released earlier this year, describes the gory details for those who mistakenly assume that bond investing today is no different than when you were younger.

Alternative investments

There are so many newfangled investment styles popping up, it is hard to keep track. This is another area I plan to cover in some detail in an upcoming RetireMentors article for MarketWatch. Suffice it to say, alternative investments can be straightforward or very opaque. If you use them the choice is yours. My clear preference is for the former, and for all the most well-heeled families, I think that should be their preference too. I say that having been one of the first managers of an alternative strategy mutual fund.

Conclusions

Retirees and those approaching retirement have a clear choice today: make assumptions that today seem comfortable, or question the conventional wisdom and seek to truly understand how they arrived at those assumptions. The difference is worth a lot to you. Don't get fooled.

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